Dollar hits 18-month high against euro

U.S. currency consolidates just below 118 yen

RachelKoning

CHICAGO (MarketWatch) -- The dollar was at its highest in 18 months against the euro and held near 26-month highs against the yen Monday, a nod to the interest-rate advantage the greenback holds over the world's leading currencies.

The euro fell through another psychological stronghold, $1.18, trading as low as $1.1777 earlier Monday. Last Friday's breach of $1.20 unearthed a flood of protective sell-stops that launched the shared currency in a veritable free-fall until it pulled up shy of the 2004 low of $1.1759.

"A significant outperformance of U.S. GDP growth relative to the rest of the [Group of Seven largest industrialized nations], as well as a growing interest-rate differential as the Fed relentlessly raises rates and other central banks remain on hold, are working to the greenback's favor," said Chris Probyn, chief economist at State Street Global Advisers.

Late in the trading day, the euro had scrached back to trade little changed against its U.S. counterpart, at $1.1809.

The dollar fell 0.6% against its Japanese counterpart, at 117.60 compared to 118.30 late Friday.

Euro holders grew more defensive late last week when European Central Bank President Jean-Claude Trichet offered few clues to suggest a rate hike there was coming in December or early next year as some in the foreign-exchange market had guessed.

Fed Chairman Alan Greenspan, on the other hand, crowed over the U.S. economy's prospects before lawmakers last week, just a day after the bank raised rates for a 12th time and left the door open to additional measured moves.

Trichet, speaking in Switzerland on Monday, said central banks must be ready to raise rates should inflation expectations grow worrisome, but his words weren't taken as a direct commentary on upcoming ECB meetings.

Dollar-yen remained just under the 118.33 mark touched late last week, territory last charted in August 2003.

Japan isn't seen touching its ultra-easy monetary policy until at least well into 2006, once expected gains in consumer prices take hold in the economy.

The euro's woes were aggravated by ongoing violence in France.

Scuffles between mostly young adults and law enforcement in some poorer suburbs of Paris beginning Oct. 27 have grown increasingly violent, resulting in one death over the weekend and several seriously injured policemen. The violence began with the accidental electrocution of two youths fleeing police.

Frances's worst violence in decades, which only escalated after President Jacques Chirac vowed to crack down on the offenders, has now raised some concern for investor sentiment. Tourism and economic impact were so far believed to be negligible. See related story.

"Nothing makes currency investors more nervous than wanton destruction of property and the collapse of law and order and until calm is restored in the euro-zone's No. 2 economy, the euro remains a very high-risk proposition," said Boris Schlossberg, currency analyst with FXCM.

"For now at least, the political troubles of the French will make every rally in the euro-dollar a selling opportunity."

State Street's Probyn said the dollar can't completely shake the investing world's concerns about the U.S. current account deficit, which could return to the fore with a report due Thursday.

Trade data on Thursday may ressurect currency market focus on U.S. imbalances. These statistcs are one piece of the current account, a broad measure of trade and investment flows. The U.S. so far finances its trade gap with foreign investment in U.S. markets. See the Economics and Politics page.

The dollar gained 0.2% against its British counterpart; sterling was changing hands at $1.7451 compared to $1.7490 Friday.

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